Coffee Memo | Rob Talks With Michael Nugent Ep. 7
Episode Summary
In this interview, commodity trading veteran Mike Nugent of MJ Nugent & Co discusses the current coffee market volatility, emphasizing the importance of understanding historical trends and the impact of weather and politics on supply. He highlights current coffee market trends, the challenges faced by both roasters and farmers, the variability in consumer demand, and offers advice for small roasters navigating this complex landscape. Nugent underscores the significance of integrity and quality in business practices as essential for success in the coffee industry.
Episode Notes
- Coffee market volatility has become the norm in the past few years.
- Understanding historical context is crucial for predicting coffee market news.
- Weather events have historically influenced coffee market trend fluctuations.
- Political factors can also impact coffee supply and pricing.
- Current challenges include high costs and supply chain issues.
- Coffee market news suggests consumer behavior is shifting, especially among lower-income groups.
- Retail prices are at record highs, affecting demand.
- Small roasters must focus on quality and customer relationships.
- Integrity in business practices is essential for long-term success.
- Coffee market trends are influenced by both natural and human factors.
Learn more about Mike Nugent's recommended reading and viewing:
- Trading Places starring Dan Aykroyd and Eddie Murphy, available to stream on Paramount+, Amazon or Apple TV
- Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay
MIKE FERGUSON: Welcome to Coffee Memo with Rob Stephen, a podcast where we talk about coffee industry news and current affairs. This is episode seven of Coffee Memo and we have a special guest. I'll leave introductions to Rob, but the topics covered in this episode include what else? The coffee market, including some historical context and just context in general. We also get to learn a few things about our guest.
So Rob, for this episode, we're doing something special. We have a guest for the first time. Tell us who it is and why you asked him to be a guest on the show.
ROB STEPHEN: Yeah, I'm really excited about this one. So, to give a little background, I've been trading for, you know, 15 to 18 years. Can't really say exactly when I started, but in that time, the whole time I've been on the receiving end of a daily commentary on the market from a guy named Michael Nugent. And he is sort of a hero in the trading business in that everyone passes his commentary around and comments on it. It's usually the start of lot of discussions. And I don't know Mike. I sort of reached out to him on a whim and he was really generous enough to just say yes without really knowing. I've met him at a cocktail party once and said hi to him, you know. And I guess for transparency sake, I should say that we're only a customer of his in that we buy a market feed from him. So, if you can imagine in a trading floor that the price of the C market is on the wall, we pay him for that and that's it. But otherwise we don't have any sort of working relationship. But yeah, no, we had a really great discussion and I'm excited for everyone to hear it. Let's go. Mike Nugent, welcome to the show.
MIKE: Okay, cool. Let’s go.
ROB: Mike Nugent, welcome to the show.
MICHAEL NUGENT: Thank you, nice to be here. Thanks for having me.
ROB: Absolutely. So please tell our listeners who you are and what you do at MJN or Michael J. Nugent Company.
MIKE NUGENT: Well, what am I? I guess from some descriptions, I'm a bit of a dinosaur. I've been doing this for a long time, ever since college. My primary role is to work with the coffee industry in my particular realm. Price risk management is the polite way of calling what we call commodity trading. And I have been again, involved in this since walking out of the doors of the university, way back in 1970s. And in the intermediary years have served as a member of the coffee committee of the Coffee Sugar Cocoa Exchange slash New York Border Trade slash ICE for about four years. Recently, left that role. I also served as a director of the Coffee Sugar Cocoa Exchange and of the New York Border Trade. I was a member of both. Worked for big banks and brokers for my entire life until the big financial crisis came in the early part of the century. In 2008, I left a major international bank as I watched Wall Street collapsing around me and decided I needed another job and there were no jobs. So, I decided to start my own firm. So since 2008, I created MJ Nugent and Company. Why did we call it MJ Nugent and Company? Simply because I didn't think of a better name. And we're involved in, primarily in soft commodity trading and soft commodity hedge advisory. We have specialties in coffee, as you mentioned, sugar, cocoa, and cotton. We don't really, you know, I mean, some other food stuffs, but we don't get too far outside of our lane.
ROB: That's great. It's interesting. At 2008, we switched trajectories. I had my own company until that financial crisis and then decided to go work for people again.
MIKE NUGENT: Well, you work for a fine organization. I've got to tell you that. I met your big boss, your chairman, Sonny, at a World Coco Symposium some years ago. He gave what, to him was probably his stump speech, but to me, it was just an absolutely incredible talk. He held my attention. He spoke about everything from price of cocoa and cocoa farming to the water table in China and how it was changing and why it was all important. He's big thinker, and I like big thinkers.
ROB: Huge thinker. He's walking encyclopedia and really values-led. So it's he's an inspiring guy I've had a chance to talk to him a few times. It's really great. Well speaking of inspiration the reason I asked you here today we are all big consumers of your daily commentary and it's helping us to navigate these turbulent times. So we thought it would be great to hear from you not so much for your advice on the day to day but I really wanted to dig into how you think about things and if you are able to, to sort of talk about just the way that you're looking at the problems that we have today and maybe it would give our listeners just a little bit of guidance or a roadmap on how to move forward. Most of them are looking for holistic ways to think about when to fix or how the market is going. So I try and give information about, here's how you think about things. And one of the first things I always talk about is my daily news diet. And I'm imagining you have a pretty sophisticated one. I was wondering if you wouldn't mind talking about yours and then if you think there's a way that people could replicate it without maybe thousands of dollars in feed fees.
MIKE: You know, I think, you know, my blessing, if I have one in life, was I learned I learned to read as a very, very young child. And I was never a terrific student. I did manage to, you know, work my way through an education, but I always loved to read and I read constantly. You know, I read everything. I'm the proverbial guy that reads the back of the cereal box. I look up what riboflavin actually is. Don't test me, I'm not sure I remember.
These markets are literally the condensation of all kinds of information that's available in the public domain. Part of it, aside from the chore of gathering information, is, in my view, is trying to think about it independently and trying to think about it in the absence of the opinions of others. And that is not to say you ignore the opinions of others. I do not. But I try to isolate what other people are saying and come up with my own conclusions. Now, that can be very humiliating. That means you're generally going against the crowd. But by the same token, to me, it's the only honest way to do this. And occasionally there'll be a flash of brilliance and you'll, you know, I'll be right or, know, whoever thinks this way will be right. And that's the psychic income I need to continue in the quest. Look, thinking is hard. I don't know what you're thinking about. It's always hard. And this is not an easy, these are not easy puzzles to figure out, nor should they be, nor should they be. There's an awful lot at stake. I'm not sure I've answered your question completely, but my advice to anyone is just read as many newspapers as you can. When I say newspapers, whatever they are today, I'm not sure they exist anymore. Periodicals, let's call them periodicals, that's better. And, you know, just figure it out, you know. Read or listen to, know what the weather is like, not in your neighborhood, but across the country. Just know it. File it away. Travel as much as you possibly can and get to know people and ask their opinions. That has given me, I mean, I've got so many friends around the world, especially in the coffee orbit. I can pick up the phone or send a text message to someone who I know and trust that I know I'll get a straight answer from, to a question.
ROB: Yeah, no, I think perspective and having a good network are two invaluable things and they have to be built. You're not born with those, right? So, you have to create them. I think the word, there's probably many words to describe this market, but volatility has to be in the top three for what we're experiencing these days. You know, when I look at the roasters that we deal with and even a lot of the suppliers we deal with, since they've started, which even could be more than 10 years ago, because there's a lot of relatively young people in the industry. It's been a low volatility, carry market. And now suddenly we find ourselves in an inverted market with a lot of volatility. And it creates a lot of uncertainty about how to proceed. And without sort of saying this is what you should do, what kind of advice do you find yourself giving to people in terms of how to think about these kinds of situations?
MIKE NUGENT: Well, I think it's important to understand where you are. Are we in a normal kind of a marketplace? And should we expect this kind of volatility to continue? I think it's a reasonable question. And I would answer the first one and say, no, obviously we're not in a normal type of market. And I guess the next question that arises from that as well, gee, everything's changed. It's going to be like this forever. And I would counter that by saying, well, understand how we got here first. We know where we are. Before you figure, before you're convinced you know what the future looks like, you better take a good look at history and figure out what it was like before. You know, coffee, traditionally or historically has always operated in a surplus. And so that's why we, you know, we're not in a surplus now, obviously, that's why the market's inverted. So the only argument I can think of for the market remaining inverted for an extended period of time, and I'll choose what extended means. The only excuse I can give you for that would be that the financial incentives of high prices will not impact production or, regardless of the financial incentives of high prices, Mother Nature will not allow for the increase of production. Now, I can't speak for Mother Nature, but again, history suggests that there is an average, there's an average, a mean, of weather that we are shifting from. I'm not a non-believer in climate change, but markets and natural processes tend to revert to a mean. They tend to revert to a level of, a band of normal. And if one is fairly evaluating the coffee market today, it is really pretty far from the normal. It is pretty far from the mean. So I would rather force to wager or force to predict, I would rather predict that we are more likely to revert to the mean than we are to be to get further away from it over the over the next year or two. And what backs that up from a from a practical, the practical side of it is that, you know, farmers have every incentive in the world to, you know, to take really good care of their of their crops and to apply fertilizer and to spend money perfecting their farming practices and to buy equipment. That being, another mean is human nature. That speaks to the economic equation of the reversion to the mean. Human nature is pretty reliable.
ROB: We have a saying in coffee that the cure for high prices is high prices. Do you think that applies in this case?
MIKE NUGENT: Yeah, absolutely. Absolutely. You can say that in every commodity. Every commodity where people are part of the natural order of things. Coffee doesn't grow just wild out of the ground. These are not like fish stocks where you're dependent upon the natural procreation of fish. This is stuff that we plant. This is stuff we care for. It wouldn't exist in the quantities that it exists in were it not for the hand of man.
ROB: Right. So I know from reading your writings that you're very interested in history. You reference it a lot. I was wondering if you can point to any times in history where we've had similar levels of volatility and uncertainty.
MIKE NUGENT: Yeah, no, absolutely. I've got some charts here in front of me, someplace here. Let me find one here. I go back to, you know, by the way, most of the major moves we've had in coffee historically have been related to weather.
ROB: Frost and Brazil and such.
MIKE NUGENT: And there's also been some really interesting political shenanigans that have also had a play in supply. When I say political, they their basis in pure politics. We could talk about that perhaps in a bit, but let me answer your question. In the 1970s, we had the first modern big coffee market, and that was predicated by frost in Brazil. July of 1975. And then in the mid 1980s, we had a drought in Brazil that caused a big spike in the market. Then we had another frost, I think it was 1994. Then we had a drought again in 1998. And then we went into a long protracted period of oversupply. We had record crops after that in Brazil and Vietnam started to come online and the market went into the doldrums from about 1998, 1999, all the way until 2010. It started an uptrend in 2002, our next big hit was we had roya in Central America and Columbia, we started to recognize the global warming as being an issue. We had that big spike. Then we shifted over to robusta consumption, started to pick up. Vietnam really got into its prime, 13-14. Then we had another drought, and then a drought in Vietnam, and then another drought in Brazil. And of course, we had the issues with El Nino, the impact of the Vietnamese crop. It's almost always been a weather-related market. It's man-fighting weather, man-fighting nature to try to bring supply on. With a couple of noted exceptions.
ROB: And I assume the political shenanigans you're talking about are the withdrawal from the ICO?
MIKE NUGENT: Well, let's go further back to that. And no one seems to remember this, but the ICO, the initial International Coffee Agreement, the first ICA, was really, in my view, a product of the Cold War. And it's not a coincidence that the first ICA came into being after Fidel Castro rolled into Havana. And it was in the Kennedy administration. In the Kennedy, we started something called the Alliance for Progress under the Kennedy administration. And that was an outshoot, a legal outshoot of the Monroe Doctrine, if you will. And it was an attempt to persuade our neighbors in Central and South America not to fall in line with the Soviet Union and not fall in line with communism. And the International Coffee Agreement was carefully crafted to offer, not blanket price supports, price or supports for producers on an allocated basis, giving them stamps so they could have a quota, if you will, to sell coffee into the Western world, into Europe. Primarily Europe and the United States. That of course created a tremendous amount of leverage for the West with Latin America. That's a, perhaps that's too frank a description of what was going on in the hush corridors of of diplomacy, but that in my view, that's exactly what was going on. Nor is it coincidence. The ICA was dissolved when the United States walked out of the meetings in London and said, we're no longer members. Right. We're no longer in agreement. And when did that happen? The year after the Soviet Union collapse. It had served it’s purpose.
ROB: Right. No, I think context is everything. So that's a great piece of information. I noticed in your sort of recitation of all the different crises to hit coffee that you had one for each time, right? There was a weather, it was a drought, it was a this, it was a that. As I sit here having traded in this environment along with everyone else, I've got tariffs, I've got multiple years of less than expected crops, I've had a logistics crisis coming out of COVID. It's been a lot of things. EUDR, right? A lot of things all at once. Is that something that you've seen before or is that a new sort of element?
MIKE NUGENT: Yeah, yeah, forgive me. I was you know, I was using you know, kind of crowd, you know, I was doing fine art with a crayon here, you know, we just, there's always some like said, there's always a major the major moves or you know, come out of what have always come out of weather. Up moves, up moves, right? Yeah down moves different. But the there's there's all kinds of drama that happens in those valleys between the spikes. And as you say, logistics, COVID, it's always been a wild ride. You have to come to work every day. This is not a one decision market. Never has been.
ROB: No. You know, we spent a lot of time talking about supply, especially on the trading side, because it's sort of, I think there's an assumption that the market will be there to sell to. The supply side is the part that seems variable. Do you give a lot of thought about the variability of the demand side?
MIKE NUGENT: Well, if there's variability in demand, it has tended to be on the positive side. And when we talk about, you know, changes in demand, it's usually on the rate of change higher, not lower. It's an interesting question at this point, something to really think about. And it makes me wonder with the, with retail prices of coffee as high as they are today at record levels, historically at high levels, and with consumers as stretched as they are, and I believe they are, especially at the lower income level. I know this sounds, it sounds contradictory when we've got record stock market prices and S&Ps are going up, blah, blah, but you know what, that's not everybody. That's a segment of the population. That's only a segment of the population. There are a lot of people in this country, in our country, but around the world who are working paycheck to paycheck. Speaking of this country, it's not a, it's provable that credit card balances are very, very high. It's provable that defaults on auto loans are very very high a lot of cars have been repossessed. And these are these are the folks that are you know that aren't living you know aren't living at the pinnacle. They're working. They're working their way up and you know, drink coffee. They do like everyone else. Yeah, it's It's no accident that great retailers like McDonald's or you know, we're promoting happy not happy meals, but bargain meals, you know. They know what their customers want and need. It's no accident that we've seen such a turnover in the executive suites in many coffee-related companies. These have not been the best of times in spite of the historic crisis.
ROB: Absolutely. Yeah, I do want to ask about the sort of winners and losers aspect on that. But, for those who don't have the privilege of reading your daily commentary reports, you famously tracked the price of the house blend at Kirkland or at your club store. Today's was particularly alarming because they were actually out and then the Colombian was through the roof. But, that's that I've really enjoyed that tracking that you've done on that. I know it's just a personal data point, but I thought it was great.
MIKE NUGENT: Well, thank you. I'm big fan of Costco. I think that they do a wonderful job as a retailer. And I don't like shopping, but it's kind of a habit I've gotten into every couple of weeks. I'll wander into the Costco and get a little exercise walking around. And I always check the coffee aisle and I take pictures of the coffee prices just for the hell of it. Been doing that for about a year or so, especially since the high prices. But yeah, I did notice yesterday that they were out of their house blend in the Costco store that I shop in. I've never seen that before.
ROB: Yeah, it's hard to imagine them running out of coffee. So that's, that's interesting.
MIKE NUGENT: But they did have Folgers at a premium to the Colombian Supremo Kirkland, which I also found interesting.
ROB: It's hard to know how much is in people's pipelines and how far forward they are with stuff. It's production so staggered. It's interesting. So, going back to what we were just talking about, you know, obviously I don't want you to name names, but if you think about sort of segments or sectors, as you look at it, do you see sort of winners and losers or who's handling this period of uncertainty the most adeptly?
MIKE NUGENT: How do I answer that question without naming names? I was just in Switzerland at the Swiss Coffee Exporters Association annual meeting, which I attend every year. And I had an opportunity to chat with some of the major roasters and their friends. They're people I know and I can speak off the record with them. But without naming names, I started my conversation with all of them by saying, you know, under normal circumstances, in this industry, to be a roaster is a really nice thing. Because people treat you well. Everybody wants to be your friend. You buy a lot of coffee. I wouldn't trade places with you today for everything. This is an awful job you've got. They all look rather drawn. It's been a very difficult period.
ROB: Conversely, to the folks that you talk to on the supply side.
MIKE NUGENT: Well, they're also, you know, they're on the supply side, starting, you know, starting from the dealers, the importers who are supplying the roasters, they're strapped by the inverted market. They're strapped by the relatively high cost of money. They're also strapped by sheer limits of capital that they're able to obtain from their banks. It's not an easy time. This is the golden age of being a farmer. Obviously. But they've also faced higher costs of fertilizer, etc. So I guess relatively they've had the best of it, but they deserve to have the best of it once in a while because normally they're the people that really pay the price for the rest of us, the producers.
ROB: They would need to have a long upside for it to be anywhere near even. So both Mike Fergie here, my producer and I are big fans of your writing. Both of us are amateur writers and been admirers of your writing. And just wondering if you have a writing background and do you enjoy writing as part of your day-to-day job?
MIKE NUGENT: Yeah, funny. I went back to college kind of late. I got a bad start in college and didn't do a lot. But in my mid-twenties, I went back and got my degree. And by accident on the campus, one of the courses I had to take was a journalism course. It was an elective that I chose. Part of the requirements of the journalism course was that you had to work for the campus newspaper. And I wandered into the campus newspaper office to volunteer to try to write some stories. And I walked into a political maelstrom. The editor of the newspaper was leaving school, and they had to elect a new editor-in-chief of the newspaper. And I just, I was a little older than the rest of the kids and kind of quietly sat in the back room and just listened to people cut each other's throats and campaign for this job as editor. I couldn't figure out why they were so intense about it. And then somebody talked about the full scholarship that was attached to the editorship. And I realized, said, holy, and I was poor. I was dirt poor. I didn't have any money. I said, wow, full scholarship. So I just, you I watched for a while and I casually dropped my name into the hat for the editorship job. And nobody knew me again, because I was kind of a new guy and older. They were so busy again, you know, killing each other, that I got elected to edit the editorship and I fell into it and I got the scholarship. And I enjoyed it and I worked very hard. And as I was graduating, was, again, I needed to get a job and I had a job interview at Merrill Lynch and I accepted a job as a trainee at Merrill. But before I left the campus, I was at the president of the university's home for a big Christmas party. I graduated mid semester, mid year. One of the members of the board, trustees of the university came up to me and introduced herself. She said, you're Mike Nugent. I said, yes. She said, you're the editor of the newspaper. I said, yes, I am. And she said, I've really enjoyed reading your editorials and the way you've changed the newspaper. And she said, I'm a trustee of the university. I said, yes, I know, ma'am. And she said, well, I'm also a trustee of Columbia University. And I've shown your work to some of the some of my colleagues at Columbia, and we're prepared to offer you a full scholarship to the journalism school at Columbia. Yeah.
ROB: Road not taken, huh?
MIKE NUGENT: Now, here, yeah. Well, here's a guy who, you know, again, I had to scrap my way to get it to get my bachelor's degree. And I said, holy cow. And I couldn't do it. I didn't because it was a full time job, the graduate school of journalism. And I didn't have any money to eat. I didn't have any money for rent. I didn't have any of that. And I said, I can't, I couldn't do it. I have to take a job. So I took the job with Merril and I've you know, but I continue to enjoy writing. You know, I've had some Walter Mitty moments. you know, I went off to… I covered the I covered the America's Cup in Perth, Australia. When the US lost the America's Cup and they regained it in Perth, I went over to Australia for complicated reasons as a journalist to get away from the United States for Christmas. You know, I've done stuff like that. I've written and I've enjoyed it. I like writing, but more than writing, I like thinking.
ROB: Yeah. No, that's clear. It's clear in your writing. Here on the trading floor, we have a lot of your favorite quotes that we, know, in times during the day where we'll get your report and then people will randomly burst out laughing. My favorite of the recent past has been when you said someone had predicted ten of the last seven bull markets. That was one of my favorites.
MIKE NUGENT: Look, Rob, very, very little of what I, very few of my quotations are original. When you pick up over a half a century of doing this, you'll hear a lot of very interesting things.
ROB: Yeah, that's a good one either way. So last question I want to ask you, and you can sort of make this a twofer. Do you have any parting advice for small roasters who are trying to navigate this market? And also, can you recommend any books or movies that you enjoy that would help provide some guidance or context in these times?
MIKE NUGENT: Books and movies. One book, it was written in the mid 1800s by Mackay, it is Extraordinary Popular Delusions and the Madness of Crowds, was book on economics and a book on human psychology, and nothing has changed. Nothing has changed.
ROB: People are people.
MIKE NUGENT: So Extraordinary Popular Delusions and the Madness of Crowds. And of course for films, there's nothing better than Trading Places with Eddie Murphy.
ROB: That's our favorite here. I can't believe you just said that. We make all the new traders watch it.
MIKE NUGENT: That's just a wonderful, wonderful film. Advice to roasters, my advice to roasters is the advice I'd give anyone that was in business, whether they were roasting coffee or making pies. Produce quality, maintain your integrity, do what's right, treat your customers as the most important thing you have. They can go away if you don't treat them properly. But to your own self be true and things will work out.
ROB: Words to live by. Mike Nugent, thank you very much for your time. You've been really generous. Just thank you for spending some time with us.
MIKE NUGENT: Well, thank you very much, Rob and Mike. It's a great honor and I don't do this very often. So thank you. Ask me back again. Maybe I'll have something new to say.
ROB: Will do, the honor is ours. Thanks Mike.
